Can Your Contracts Move as Fast as the Next Supply Chain Crisis?

By Vivek Bharti

The most strategic procurement departments in the world already know: You can only be as agile as your contract processes.

Key Takeaways:

  • Agility emerged as the ‘antidote' to 2020's massive supply chain disruptions, and continues to be a top priority for sourcing leaders
  • Digitally supported supplier evaluation, risk management, onboarding and collaboration is key to developing the strategic sourcing relationships companies need to achieve agility
  • Digital transformation of the supply chain should begin with contracts, the ultimate output and foundation of every supplier relationship

For supply chain leaders, these past 18 months have proven that agility is paramount.

"Agility does trump forecasting," Marc Engel, chief supply chain officer at Unilever, declared last July at a "Transform Europe" virtual conference sponsored by Reuters. "At the end of the day, every dollar we spend on agility has probably got a 10x return on every dollar spent on forecasting or scenario planning."

In its 2021 CPO Survey, Deloitte reports that this focus on agility continues as the economy begins to move past the current crisis.

"It turns out that agility is indeed a sort of antidote that helps inoculate firms against complexity and risk so that they deliver healthy performance results even in the toughest of times," Deloitte writes.

Procurement: In the Driver's Seat, or the Hot Seat?

This is being borne out right now in the auto industry.

As detailed by Bloomberg, carmakers are grappling with two challenges that it will fall on procurement to address: low production due to a shortage in computer chips and high prices due to increases in raw material costs.

This situation perfectly illustrates why CPOs are now expected to deliver strategic advantage to their organization beyond cost savings.

"Looking beyond the pandemic, the recent growth in complexity, risk, and need for external innovation is increasingly opening the door for procurement to be seen as a true strategic partner," Deloitte reports. "CPOs have expanded their value propositions beyond just cost reduction and supply assurance to an orchestration of broader value … These increasingly fast, iterative, and cross-functional projects are using technology and analytics to target efficiency gains while also improving organizational/talent models."

Supplier Relationships in the Always-On Age

The question, then, is: Where should procurement look to find those efficiency gains, and what technology can help them get there?

The answer lies in the relationships companies can foster with their suppliers. Deloitte notes the glaring technology gap that exists around supplier collaboration. Considering how critical digital communication and collaboration have become in day-to-day business (think Teams and Slack), it's notable to learn from the CPO survey that less than half (48%) of companies today utilize a supplier relationship management (SRM) tool for supplier collaboration.

This is despite the fact that "enhanced supplier information-sharing was the top supply risk mitigation strategy (75%)."

Contracts: The Hidden Wrench (and Value Lever) in the System

When exploring digital solutions to improve supplier collaboration, procurement organizations should think holistically about what aspects of their sourcing workflow create the most risk, delays, and friction—i.e., aspects that impede effective and value-additive collaboration.

For many organizations, unfortunately, contracting fits the bill.

Tim Cummins, president of World Commerce & Contracting, put it this way in 2019: "There is little question that most people would like their trading relationships to be agile. Quick and easy to identify the right supplier or customer; quick and easy to reach agreement on the terms; quick and easy to undertake delivery; quick and easy to make changes or secure improvements. But as [WCC's] 2019 Benchmarking Study shows, ‘quick and easy' is not a description that can often be applied to the overall contracting process."

Contracting is emerging as a critical process for car manufacturers as they attempt to shore up their chip supply. From the Financial Times:

"Carmakers have started contracting directly with foundries. Motor groups ‘will have more direct dealings with the contract chipmakers,' said a person who is advising a European carmaker on rejigging its chip supply chain. ‘That means they have to invest in in-house expertise and it also means dedicated buying agreements.'"

Clearly, the automakers who can execute these contracts and buying agreements fastest while still managing for supplier risk will be in the best position to navigate the supply pinch.

Faster, Safer Sourcing at Daimler

Because contracts are the foundation of every supplier relationship, innovative companies have realized the importance of leveraging advanced digital contract technology to carry out broader supplier efforts.

Ulrich Ochmann, a product manager at Daimler, explained why his company took this innovative approach: "We wanted sourcing and contracting to go hand in hand, because in procurement you start with sourcing, but immediately you also start your first contracts. When this is joined in one powerful tool, you have everything transparent."

For Ochmann and Daimler, the outcome has been faster supplier collaboration that simultaneously delivers better risk management.

"From sourcing to contracting we have gained speed. But it has also made us safer. It has made us faster, stronger, and more efficient."

In other words, more agile—the vital strategic advantage that up-to-the-minute digital contract technology can bring to your organization's procurement process to help it not only weather unforeseen disruptor events, but also continue to remain out in front into the future.

Next Steps

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